Paper Money

The use of paper money is believed to have started in China between the 7th and 9th century A.D., to overcome shortages of coins. In Europe, in medieval times, letters of credit, effectively personal banknotes, were exchanged between businessmen who knew and trusted each other. Later, a practice grew in which goldsmiths gave receipts for gold left in their charge, and these receipts were exchanged as money. During the 18th and 19th centuries, first private bankers, and then central banks, took over this role. They issued notes, each of which was a “promise to pay”: words that still appear on many banknotes. Until 1931, when many countries, including Britain, went off the Gold Standard - the holders of banknotes were usually entitled, in theory, to demand from the issuing bank, that the notes should be redeemed in gold. Since then, however, notes have resumed the status of primitive beads - a means of exchange which had value only if the paper is trusted.